Statistical modeling and forex trading
In addition to decades of historical price data, traders can also use their own trade data to model their risk/reward and profit/loss ratios. Find out how to use simple equations and metrics to guide future trades.
Key points
- Trading often gives traders a more accurate idea of their expected return
- Price extremes can be a good place to either go with or against the trend
- Using stop-loss and take-profit orders can help manage expectations around risk and reward
As traders open and close positions, they accumulate data that can be used to manage future trades. Averaging the profits and losses over time provides an expected return per trade in a single number. Ideally, this expected value is positive, and further analysis can help increase returns.
Risk / Reward example
The risk-reward ratio (R/R ratio) is a way of assessing the expected return on a trade per unit of risk. As a trader, you’d typically use the monetary amount you stand to lose as the risk input, and your expected profit as the reward. So, if you risk $100 and expect to make $300, your R/R ratio will be 1:3, or 0.33.
Let’s look at a theoretical trading example. Say you expect a US dollar pair to appreciate 100 pips, so you open a 1 lot long position and set a stop-loss order to automatically close your trade if the price drops 40 pips.
Assuming the stop-loss order fills in full at the set price level, the maximum amount you stand to lose is $10 per pip x 40 pips = $400
Your expected return is $10 per pip x 100 pips = $1000
Your R/R ratio is 1:4, or 0.4
How to trade forex using analysis
- Choose the forex market you’d like to trade
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions
Trading forex using technical and fundamental analysis requires an account with a forex provider like IG and a strategy. Most strategies applicable to trading in other markets can be used to trade forex as well, including technical and fundamental analysis. You can also develop your forex trading strategies using resources like IG’s Trading Academy.
Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.
This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.
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